Perpetual Inventory System vs. Periodic Inventory System: An Overview🏅

Inventory refers to any raw materials and finished goods that companies have on hand for production purposes or that are sold on the market to consumers. Two types of inventory are perpetual and periodic inventory. Both are accounting methods that businesses use to trac🧸k the number of products they have available. But they are inh♒erently different.

Perpetual inventory is computerized, using point-of-sale and enterprise asset management systems, while periodic inventory involves a physical count at various periods of time. The latter is more cost-efficient, while the former takes more time and money to execute.

Perpetual Inventory System

The 澳洲幸运5官方开奖结果体彩网:perpetual inventory system keeps track of inventory balances continuously. This is done through computerized systems using 澳洲幸运5官方开奖结果体彩网:point-of-sale (POS) and enterprise asset management technology that record inventory purchases and sales. It is far more sophisticated than the periodic system of inventory mana🐷gement.

Perpetual inventory is a highly detailed system. Changes in inventory are accurate (as long as there is no theft or damage to any goods) and can be easily accessed immediately. The 澳洲幸运5官方开奖结果体彩网:cost of goods sold (COGS) account is also updated continuously as each sale is made. The information collected digitally is sent to central databases in 澳洲幸运5官方开奖结果体彩网:real time.

Because it involves the use of technology, pe🍨rpetual inventory requires very little effort ♎from businesses (if at all):

• Products are given barcodes, which keep track of their movement and how long they’ve been on the shelf.
• Computer software is added to the mix, which takes care of updating the inventory that goes in and out of a company through the point-of-sale system.
• Separate ledgers keep information about purchases, COGS, and remaining stock.

Perpetual inventory can be very costly because of the expense associated with implementing and maintaining the 澳洲幸运5官方开奖结果体彩网:infrastructure. However, using this system is much easier and simpler than the periodic system. Not only does it allow for real-time monitoring, but perpetual inventory is also much more accurate than physical counts. And since each product has a barcode attached, companies can👍 get more detailed information about everything that goes in and out of their warehouses.

Periodic Inventory System

The periodic inventory system is often used by smaller businesses👍 that have easy-to-manage inventory and may not have a lot of money or the opportunity to implement computerized systems into their workf🧸low. As such, they use occasional physical counts to measure their inventory and the cost of goods sold (COGS).

COGS is an important accounting metric, which, when subtracted from revenue, shows a company’s 澳洲幸运5官方开奖结果体彩网:gross margin. The COG𝓡S unde꧟r the periodic inventory system is calculated as follows:

COGS = Beginning Balance of Inventory + Cost of Inventory Purchases - Cost of 澳洲幸运5官方开奖结果体彩网:Ending Inventory

Companies may not necessarily be aware of the inventory they hold before they conduct counts, which are done at regular intervals—weekly, monthly, or quarterly. Here’s how thওe process works:

• The party responsible for the count records all the available inventory at the end of the period.
• Merchandise purchases are recorded in the purchases account.
• This is moved to the inventory account after the count.
• This new balance is then applied to the beginning of the new period, after which the process starts again.

Since businesses often carry products in the thousands, performing a physical count can be difficult and time-consuming. Imagine owning an office supply store and tr🍷ying to count and record every ballpoint pen in stock. Now multiply that for anꦚ office supply chain.

This is why many companies🅷 perform a physical count only once a quarter or even once a year. For companies under a periodic system, this means that the inventory account and COGS figures are not necessarily very fresh or accurate.

Key Differences

One of the main differences between these two types ofꦛ inventory systems involves the companies that use them. Smaller businesses and those with low sales volumes may be better off using the periodic system. In✅ these cases, inventories are small enough that they are easy to manage using manual counts.

The perpetual system may be better suited for businesses that have larger, more complex levels of inventory and those with higher sales volumes. For instance, grocery stores or pharmacies tend to use perpetual inventory systems. The technological aspect of the perpetual inventory system has many advantages, such as the ability to more easily identify inventory-related errors and show all transactions comprehensively at the indiv💜idual unit level.

Some of൲ the other main differences between these two types of inventory management are:

• Recording methods: Perpetual systems use computers and software that automatically update a company’s ledgers with information about products that are sold and the remaining inventory. Periodic systems require manual recording.
• Margin of error: There is a greater chance of error with periodic systems because the counts are done manually. Assuming there is no chance of theft or damage to a company’s inventory, perpetual systems are often accurate and accessible easily and immediately.
• Effort: Companies aren’t required to put in too much effort with perpetual systems once the software and related infrastructure are installed. That’s because everything is done electronically. Periodic systems require physical counts and can often be cumbersome, especially if any recounts need to be done.
• COGS accounting: There are no continual entries under the COGS account associated with periodic inventory systems, as there are with perpetual systems. Rather, it is calculated using a lump sum at the end of the interval when the count is conducted.

Under the perpetual system, managers are able to make the appropriate😼 timing of purchases with a clear knowledge of the number of goods on hand at various locations. Having more accurate tracking of inventorꦚy levels also provides a better way of monitoring problems such as theft.

The Bottom Line

Perpetual inventory and periodic inventory are both accounting methods used by businesses to track the number of products they have available. Perpetual inventory takes more time and money to do, as it is computerized and uses point-of-sale and enterprise asset management systems, while periodic inventory involves a physical count at various periods of time and is more cost-efficient.